Do carbon offsets work?

When you donate money to build a new windfarm, you don’t take any of
the old, polluting power offline; you increase the supply of power,
reducing the price until others are encouraged to buy more
carbon-emitting power.

In other words, these carbon offsets shift back the demand curve for dirty power but they also shift out the supply curve for power as a whole. (The persnickety might argue the demand curve doesn’t even shift back, but if you have to buy all those offsets you will think twice about your next plane trip.) Competition from wind power forces down the price of the monopolistic dirty power company (electricity?), which means that other people buy more of it. The quantity of dirty power consumed might well go up rather than down.

A better approach for carbon offsets might involve buying up a power plant and taking it off the market, thereby raising price and discouraging consumption.

Or it might be better if that "wind farm" is a failure and a fraud.

Furthermore if you simply buy less of a non-storable good such as electricity,
price to other demanders will go back down and social quantity consumed will
not change. The boycott matters only if general
capacity shrinks over time, and that of course requires a large boycott.

If the dirty power source is from a broadly competitive sector (is there one? gasoline? cars?), the carbon offset is more likely to work. If a non-dirty competitor comes on-line, the dirty power source has no option of lowering price and expanding quantity sold; the price of the dirty power source can’t fall below marginal cost. Instead the supply of the dirty power source falls and the offset works.

The bottom line: Unless you can put them under, don’t try to compete on price with your local power company.

You ignore one more potential benefit. Almost all manufactured goods (and power is certainly a manufacturered goods) show a decrease in real unit costs of production as accumulated industry experience producing the good grows.

One could argue that wind power is not cost competitiove now because coal has been moving down the learning curve for a centurt or more, while wind has been relatively stagnant. Subsidizing wind farms will lower their current unit costs, which will make them more price competitive, which will allow them to steal market share from coal, which will allow them to accumulate experience faster, which will move them down the cost learning curve to the point where they become cost competitive without the subsidy.

I’m not sure that I understand how any renewable project could fail to “free up dirty power that will go back on the market” unless part of the project involves buying up an old coal plant and closing it (something that I’m pretty sure the local regulators would forbid you to do). Electricity is a commodity. Can you elaborate, Mr Grimmelmann?

If the goal were to reduce and/or eliminate the use of dirty power, we could simply kill all the humans and be done with it.

If we assume instead that neither humans nor their use of energy are going away any time soon, and that both in fact will be increasing, then the goal should be to reduce and/or eliminate the average dirtiness of power. Subsidies to clean power seem like a sure bet to make this happen, even if the net effect is that the cost of both clean and dirty power goes down and thus the amount of both goes up. We’ll get more additional clean power than we will additional dirty power.

More importantly, the point of carbon offsets is to be able to say “Yes, I use electricity, but unlike most consumers of electricity I’m not increasing the world carbon output when I do so.” Carbon offsets work perfectly well for this purpose (to answer Tyler’s question).

A one-ton carbon offset ensures that one ton of carbon that would otherwise have been emitted if not for your purchase – *ceteris paribus* – is not emitted. Granted, ceteris is not paribus, and your purchase will also induce others to increase their power consumption and thus their carbon output. But while you may be responsible for providing them with an incentive to increase their carbon output, you are not responsible for their increased carbon output. Incentives or no, their increased carbon output is the result of their own decision to do so.

If one’s carbon emissions are a matter for moral approbation or condemnation, then you are to be praised for reducing your carbon output through purchasing carbon offsets, and the others who bought more dirty power because the price went down are to be condemned. Unless they also bought offsets accordingly. And if everyone bought offsets equal to their dirty power purchases, then there would in fact soon be no net carbon emissions at all.

Like some other posters, I remain confused. Building a wind farm shifts the supply curve for wind power rightward. This reduces the price of wind power. Dirty power is a close substitute for wind power (indeed, a perfect substitute once the power is generated). Accordingly, the demand curve for dirty power shifts leftward. It is this leftward shift in the demand curve for dirty power that Tyler must be referring to when he says “Competition from wind power forces down the price of the monopolistic dirty power company (electricity?)†¦†. And it is true that this will cause the price of dirty power to fall, which will increase quantity demanded. But this is a movement ALONG the new demand curve, which can never return the quantity of dirty power demanded back to its original value. Therefore, the offset, by increasing the supply of wind power, decreased the final equilibrium quantity of dirty power bought and sold.

Kevin Smith beat me to it. I was going to refer to the Acton Institute’s Powerblog which says the same thing.

I guess that carbon offsets are based on an accounting balance sheet — on one side carbon is produced but on the other side the same amount of carbon is reduced so it all zeros out. Nice and neat if it actually happens. But then I haven’t spent much time reading about them. I always assumed that the offset was planting more trees or putting Geritol in the Pacific, not producing green power.

Isn’t the carbon offset just a form of price discrimination? Doesn’t the person buying the indulgence basically end up paying twice as much for the power? Getting in return a warm feeling in his/her heart?

Tyler is brilliant, so I know I’m leaving something out. Using a simple monopoly model, my earlier comment still applies. If demand for a monopolist’s dirty power shifts leftward (due to a lower price for wind power) the monopolist’s marginal revenue curve will shift leftward as well. With an upward sloping marginal cost curve, the new intersection between marginal revenue and marginal cost must lie to the left of the original intersection. So profit-maximizing quantity must fall. Clearly, there is some other factor involved that some of us (including me) are not accounting for. Is there a simple model that gives the higher quantity result?

Mark Buehner makes part of the point I wanted to make. All this talk of wind farms! We will never, ever have enough wind farms to replace the power generated by the current system of power plants. Carbon-offsets, even if they work (which I do not believe), would never be more than a boutique “cure” for those who can afford it. If widely adopted they would quickly max out the possible replacement “green” energy sources.

Now, if your carbon-offset indulgences were being used to build nuclear plants to replace coal and oil fired plants, then you’ve got something. Ironic that the people trying to force a carbon-free lifestyle down our throats are the exact same people that killed the nuclear power industry in the United States. Our electrical production would probably be entirely CO2 free by now had they not used their scare tactics and disinformation to halt all new nuke development.

It’s old wine in new skins. There’s always a new “crisis” on the horizon which somehow never quite appears, and the underlying “cure” for the crisis always involves the same thing: more government control over the population. How many times will the Left pull this rabbit out of their hats before people stop falling for it?

NYUEconProf raises a very good question. Here is one simple model. The wind power enters the market, so the monopolist lowers price (and increases quantity) to put the wind supplier out of business. Keep also in mind that the natural monopoly-esque electricity company may not face upward-sloping marginal cost. Price discrimination is another complication. But the point of NYUEconProf is correct for competitive industries. The prediction is indeterminate when market power is present.

I’ll admit to being confused for the reason stated above (courtesy of Eddie). TC’s using a definition of the term “carbon offsets” that is not familiar to me. A carbon offset is a payment from me to you that (1) grants me a license to produce carbon while (2) forbidding you to produce the carbon that I’m producing. If you’re not producing carbon anyway, (2) becomes a de facto subsidy to keep not producing carbon. In other words, I drive my car to work and pay you to walk to work, which you like fine because you work a block away. If I’m a coal power plant, I either shut down, clean up, or operate while paying my clean wind farm neighbors for the carbon that I’m expelling but they are not. Based on my distant memories of undergrad econ, this will result in a decrease in the supply of “dirty” power while increasing the supply of clean power, because we are now doing better at factoring in the true cost of dirty power (which previously had been an externality).

Am I missing something here?

(What’s being obscured in this debate is whether Gore’s carbon offset program is legitimate. It probably isn’t; but that doesn’t address whether a true carbon offset program is legitimate or not.)

There is an old saying that goes “If you are going to talk the talk then walk the walk.”.

Apparently Rev. Gore and the High Hollywood/New York clergy of Rev. Gores Church of Gaia are not willing to walk the walk. They love their mansions, private jets, SUV’s, electronic toys, air conditioned stables, expensive food, drink, flowers etc. flown in from distant parts of the globe way too much to part with them. Of course they want you to give up everything for their religion while they give up nothing and in fact become even bigger energy wasters. They even fret that third world countries are beginning to use too much carbon and think they should remain in the dark ages-probably because they are worried that they wont have enough fuel for their jets and yachts not to mention their mansions. But they are worried that they are beginning to look a tad hypocritical with their “do as I say not as I do” rot. So they, like the decadent and corrupt aristocracy of the middle ages, have come up with their own form of “indulgences” known as “carbon credits”. That way they can have their carbon guzzling “sins” washed away in a great big ponzi scheme that also serves to make them richer. I know that many are not aware of the fact that Rev. Gore himself owns one of the largest “carbon offset” sellers. See http://www.ecotality.com/blog/?p=350

Rev. Gore took L. Ron Hubbards advice to heart, “If you want to be filthy rich forever invent a religion”. He did, and the same suckers who fell for Scientology have now fallen for the Church of Gaia.

NYUEconProf:
I hate having to do price-quantity graphs the way you econ profs do them (price on the left and quantity on the bottom) because it flies in the face of my mathematics training that the independent variable goes on the horizontal axis, but I’ll try to flop my mental axes and answer your question:

With an upward sloping marginal cost curve, the new intersection between marginal revenue and marginal cost must lie to the left of the original intersection. So profit-maximizing quantity must fall.

The problem with your analysis is the upward-sloping marginal cost curve. Costs to electric utilties have to be considered on various levels: On the capital level, there is the cost to build the power-generation and distribution facilities. On the next level is the maintenance of those facilities. These two kinds of costs produce an upward-sloping marginal cost of electric generation and distribution capacity. The day-to-day operation level puts a marginal cost on the actual generation of a kilowatt-hour of power that is pretty low. I don’t have any hard numbers, but I’d imagine that it’s dwarfed by the other cost categories.

The result is that the shift of the demand curve to the left is reflected almost entirely in the equilibrium price dropping, and the quantity prosumed only going down slightly, if at all.

The long-term effects are: Because the utility is making a lower net profit on the lower-priced electricity, it has less incentive to build any new dirty plants (if the effect is large enough, perhaps even to maintain the existing plants) and possibly more incentive to build new clean plants. Because the consumers expect dirty electricity to be cheaper, they may have less incentive to purchase more efficient appliances, causing the long-term demand curves for both dirty and clean electricity to shift back to the right.

Which doesn’t reduce the amount of dirty electricity produced, but at least it doesn’t increase it.

Belated reply to Jane Galt: because I was talking also about subsidizing carbon sequestration, not just renewable power. (Yes, Tyler’s post was about power generation, so I should have been clearer that I was tlaking more generally.)

I’ve ran the numbers, the number one solution to reducing carbon dioxide emissions is putting out underground coal fires around the world, and replacing all coal plants with nuclear power plants. Wind and other renewables is not the answer in this century.

Why don’t they use these carbon offsets to pay average people like me to put a solar cell on my roof or supplement my purchase of a hybrid? If they did that it would help average people, the economy (in multiple ways like manufacturing of the cells and vehicle) and the environment in a far greater manner then they currently do.

That should be the core of liberalism – but of course that would leave the power in the individual so they would never go for it.

At the present time, the installed base of PV generation, wind generation, and biofuels are doubling every two years or so (it varies, and the exact numbers are not necessary for this discussion.) Over 6 years, each of those sources will incrase by a factor of 8, assuming that people continue to work hard and solve technical problems, and if funding for construction can be found. Also, costs of manufacture are declining. Over 18 years, there will be an increase, potentially, of these CO2-free energy sources of about 8*8*8 = 512. That’s assuming that funding continues to come in, and “Indulgences” are one of the sources of funding.

Meanwhile, the old, dirty electricity is being used to manufacture the PV cells, wind farms, and biofuels facilities, but 18 or 36 years from now the facility will be worn out, and will have to be replaced. That is when the CO2 savings really start to occur, because it will not be replaced by a copy of itself, but by the technology of 18 or 36 years from now.

The fact that electricity use is growing at 2% per year is important, and increased manufacture of windfarms and PV cells may transiently increase CO2 emissions from electricity generation and use, or may not, depending on how rapidly people and firms shift to energy-conserving appliances. but the supply-demand curve is not relevant to this argument, as it deals only with short-term changes in customer behavior, not with long-term investments. Add to that, many people are motivated by other things than the pure cost-demand calculations (e.g., guilt over CO2 use, a vague sense that pollution is bad or has external costs, etc.)

In short, the “indulgences” help to pay the cost of the transition from the way that we do things now to the way that we’ll be doing things 20 and 40 years from now. And if the rich people pay more for the transition than the non-rich, that doesn’t matter much. Either through taxes, investments, or indulgences they’ll pay more anyway.

If you don’t have stored capacity, e.g. hydro to adjust for wind, you have to fluctuate other generation. Wind and nuclear don’t mix because you can’t cycle nuclear units like gas plants to adjust for fluctuating wind. Besides, gas plants are cheap to build. If we build wind in inefficient locations we have to install more back up capacity and burn more gas. You can’t just have wind produce peak power. What do you do at non-peak times when wind is at full force? Dump it into Norway FREE like the Danes do and then let the water run over the dams? The exercise is to figure out how wind changes the supply mix and calculate the costs-benefits of the mix. The EU did a comparison. External Costs-Research results on socio-environmental damages due to electricity and transport – EUROPEAN COMMISSION 2003 http://www.externe.info/externpr.pdf . It’s tough to beat nuclear for base load which is most of the energy demand. So where does that leave wind without storage?

Apart from the economic and social engineering, it’s also extremely likely that planting trees as a carbon offset will make things worse. That’s assuming a one-to-one offset. Trees filter dust out of the atmosphere, which decreses its albedo. That’s a warming effect, sort of a reverse “nuclear winter”. Are the offsetters factoring in considerations like that? Plus, what happens to all that amassed carbon once those trees die? If we have an appreciable increase in termites due to the increase in trees, then we’ll have a corresponding increase in termite flatulance. Final net result: people will be offsetting CO2 with methane, which is a much more potent greenhouse gas.

“The best and most direct way to offset carbon would be to pay to have the carbon removed from the atmosphere. That is why the Richard Branson prize to come up with the best way to do this is right on target.”

Doesn’t this effort just scream “unintended consequences”??? Carbon is SUPPOSED to be in the atmosphere. C02 is necessary for life on this planet. Sure, we are putting more into the atmosphere than perhaps we should, and reducing emissions is a almost certainly a worthwhile goal. Call me over-cautious, but this Branson scheme sounds crazy.

Isn’t it naive and simplistic to restrict carbon offsets to energy itself? Doesn’t almost any product or service require energy for its production?? Seems to me that wearing socks with holes in them for a while, instead of buying new ones, would reduce carbon emissions. Spending less money (not more for offsets) cuts energy use — and the cost of providing products and services obviates the need for complicated computations.

The opening statement is quite wrong. In an auction market (or administered dispatch), power generators bid their MC. For wind that’s essentially zero. For coal, is the cost of coal times the plant efficiency; so to for gas and oil units. If the clearing prices is greater than MC, the plant runs and the owner picks up some change. If prices are high, a lot of change. If lower than MC, the plant doesn’t run. So at the margin, wind farm capacity, bidding zero, forces some fossil units to shut down when they would otherwise be running. And the system operator knows exactly what units are at the margin at every point in time. So we kown exactly which units would have been running absent wind, and how much carbon fuel they would have burned.

This is insanity. Has power consumption ever gone down? NO. Will it? NO. What’s this crap about mothballing old plants thus reducing supply and raising the price. NEWS FLASH!!!! As soon as Power is CHEAPER for me to generate than it is to buy off the grid, I hook the generator up to my panel and make my own power. What happens then other than increased pollution due to the obvious inefficiencies? You gonna send the generator police out after me? You guys really need to get off the pot and clean up.